Chad Moore Calgary Mortgage Broker

Persistent inflation is a big risk to the Mortgage interest rate outlook in Canada. Check out my previous post that covers how inflation can also play out to be transitory (link).

An even BIGGER risk to Mortgage interest rates is the Bank of Canada responding too late to persistent inflation. A delayed monetary policy response to high inflation would spike interest rates, effectively slamming the brakes on the economy!

Benjamin Tal, top economist with CIBC, outlined several points that I wanted to pass along. Let’s discuss this information and watch for data throughout the Summer/Fall to anticipate persistent inflationary pressure that will influence Mortgage interest rates.

1. Nature of recession.
2. Return of the service sector.
3. Release of pent up spending.

These three points have the potential to keep inflation persistent in our economy. To the extent inflation runs hot, and remains at elevated levels for an extended period of time, this might lead to monetary policy tightening.

Let’s review …

Nature Of Recession:

Unlike previous recessions, the economic consequences of the COVID-19 induced economic lockdown has not been evenly distributed throughout the economy (link to Financial post article here). I’ve heard this economic recovery referenced as a “K shaped recovery”.

The upward portion of the letter K references some people benefiting from current economic circumstances. These circumstances include, but are not limited to:

• Ability to work remotely.
• Earn equal to, or more income, during the pandemic.
• Ability to purchase assets that have experienced inflated values (stocks/Real Estate).
• Take action on easy monetary policy and government support programs for their benefit.
• Saving more money and paying down debt due to reduced options to spend (ex, eating out, traveling).

The lower leg of the K symbolizes people deeply affected from the government induced health crisis (falling further behind?). This includes:

• People losing jobs either permanently or for extended periods of time.
• Spending savings or relying heavily on government support programs.
• Unable to purchase assets that rise.
• Stagnant income earning.

The nature of the pandemic induced recession has been very deep and narrow for some sectors of Canada’s economy and not as economically bad for other sectors of our economy.

Service and hospitality verticals of our economy have been deeply affected as an example. Through government imposed restrictions, due to health concerns, these employment verticales are suffering. We’re all familiar with closures of our favourite restaurants and travel restrictions.

With this recession turning out to be K shaped, a large majority of the economy has received monetary and fiscal policy response benefits, as if a more traditional (wide spread) recession had taken place.

As a result, people who are able to are taking advantage of recession fiscal and monetary policy, even though their vertical of employment is not “in a recession”.

National Real Estate prices are up 30% year over year. Some segments of Calgary’s Real Estate market are back at 2014 price peaks. Whaaat? High income earners, who are able to continue earning, are benefiting from artificially suppressed fixed interest rates and accommodative rates from the Bank of Canada.

As the vaccine roll out continues, and we all move through the pandemic, there will be a return of the service sector …

Return Of The Service Sector:

Over the past 15+ months Canada’s economy has been on a rollercoaster of opening and closing to mitigate the total collapse of our healthcare system.

As we have experienced, when policy makers allow economic openings to happen there is a reasonably fast uptick of hiring and servicing of customers. Are you quick to head back to open patios when they’re available?

The service industry is seemingly able to meet new demand rather quickly. If there is a consistent opening of the economy, as future threats of fourth/fifth/sixth waves of COVID ease, that would provide even more confidence for the service industry to hire and expand. This means people will be SPENDING!

I don’t know about you, but I am hearing more and more anticipation of traveling again. You betcha there is pent up travel demand that is waiting for the green light to be released!

With the return of the service sector, there is a release of pent up spending looming …

Release Of Pent Up Spending:

Think about yourself for a second. If a magic wand was waved, and all health concerns disappeared, would you spend more money? Travel more? Or would your habits change? Would you continue to “staycation”, travel locally and eat in?

Savings rates have spiked since the lock downs from Spring 2020. There is estimated $1.8B of money sitting on the sidelines waiting for the green light to be spent.

People are dying to go out and spend, but not willing to die doing it.

Canada’s finance minister made comments earlier this year referring to deployment of Canadian savings into the economy as a source of potential stimulus. I agree. To the extent people are willing to spend again, that will move the needle of our economy.

I often joke that governments do not like people saving and paying down debt. A large part of our economy is based on consumer spending. Our economy needs us. So, if you’re spending – thank you ;-).

If the savings rate of people has been building, so has the corporate savings rate! There is personal and corporate money on the sideline right now waiting for deployment!

Conclusion:

Mortgage rates are artificially suppressed, capped and pinned to the floor right now. And for many good reasons. However, persistent inflation is a risk to Mortgage rates rising.

Not only is persistent inflation a threat to Mortgage interest rates, an even bigger threat is monetary policy makers over reacting to inflation. This means raising rates too quickly and or by too much.

There is one sure-fire way to slam the breaks on Canada’s economy and housing market …Bank of Canada rate hikes!

Let’s continue to watch how the nature of the reopening, return of some service sectors and pent up spending influence inflationary pressure.

Tinfoil hat time …Stats Canada could simply change how they measure inflation numbers. Honestly, how they measure the “basket of goods” in Canada is already under scrutiny. For example, housing inflation is measured on monthly payment amounts, not values. With interest rates abnormally low, housing inflation is flat or even down because payments are lower. Meanwhile, out here in reality, national values are up 30%.

Reality hat back on …let’s be fair to Stats Canada and plan for the basket of goods to stay somewhat reasonable and unchanged moving forward.

Thank you!

I’m having more and more people email me with questions and their thoughts about Calgary’s housing outlook. Thank you! Please also comment below.

These posts do take a reasonable amount of time to create for you. Thank you for reading and sharing this content. Reach out if you are planning to sell, purchase, refinance or renew your Mortgage.

Talk soon,
Chad Moore

403-809-5447
chad@canadamortgagediret.com